Trends in Wholesale Electricity Prices in Victoria PRESENTATION TO AIE’S ENERGY PRICING IN VICTORIA: TRENDS, CAUSES AND THE
FUTURE, 25 JUNE 2014
Discussion points
1. Focus is on wholesale market
2. Discussion to cover:
• Historical review • Fundamental drivers of price setting • Outlook for electricity prices in Victoria
Background
1. NEM commenced operation as a “national” market in December 1998
2. Evolved out of the combined NSW/Victoria pool market linking the SA market into these two markets.
• Vic Pool operating since 1992 3. Queensland became integrated in 2001 with commissioning of Eastlink and
Tasmania in 2006 with commissioning of Basslink.
4. Now fully integrated market
Price History
• Prices have moved up and down reflecting broad energy policy changes, temporary supply constraints, adverse weather.
– In other words, have reacted to changing supply/demand conditions. • Prices across the States converged especially after interconnection capacity was
enhanced
• Prices are currently at the lowest level in real terms since the combined national market commenced operation
– Prices have recently increased in some states (e.g. Queensland, Victoria) due to capacity withdrawals
• Increased in mid 2012 as a result of the commencement of carbon pricing
– Around $20 to $25/MWh contribution from carbon pricing
Price History
0
10
20
30
40
50
60
70
80
90
May-95Nov-95May-96Nov-96May-97Nov-97May-98Nov-98May-99Nov-99May-00Nov-00May-01Nov-01May-02Nov-02May-03Nov-03May-04Nov-04May-05Nov-05May-06Nov-06May-07Nov-07May-08Nov-08May-09Nov-09May-10Nov-10May-11Nov-11May-12Nov-12May-13Nov-13May-14
$/MW
h
Quarter Ending
Real Regional 52 Week Pool Price ($June 2013)
Vic NSW Qld SA Tas
Separate State Markets
NEM 1
NEM 3
QNI
Basslink
Drought
Renewables and GFC
Carbon Price
Price History
0
10
20
30
40
50
60
70
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$/M
Wh
Financial Year ending June
Vic Spot Price June 2013 dollars
Factors Affecting Recent Price Trends • Demand has shown steady declining trend since 2009
– Energy efficiency – Reaction to high retail prices – Industry restructuring – Small scale renewable energy generation
• Milder winter and summers
• Large scale renewable energy generation
• Some of these factors will change putting upward pressure on prices
– Rising fuel prices (legacy contracts expire) – Capacity withdrawals – Limited strategic bidding
• Basically market is responding to supply/demand balances
Price Volatility
• Level of volatility is an important indicator of market health
– Price spikes or increasing incidence of price spikes is an important signal for new investment. It is a key feature of price only markets.
– But high incidence of price spikes could also be an indicator of market power • Level of volatility has been up and down!
– Has been a lower level of incidence in most States (since late 2010) – But in some smaller States constrained by interconnect capacity incidence
has been at trend levels – Also a cyclical pattern to spikes, with increased incidence during summer
and mid year in peak demand periods and/or contract renewals
Price Volatility
0
20
40
60
80
100
120
140
160
180
200Ju
l-94
Jan-
95Ju
l-95
Jan-
96Ju
l-96
Jan-
97Ju
l-97
Jan-
98Ju
l-98
Jan-
99Ju
l-99
Jan-
00Ju
l-00
Jan-
01Ju
l-01
Jan-
02Ju
l-02
Jan-
03Ju
l-03
Jan-
04Ju
l-04
Jan-
05Ju
l-05
Jan-
06Ju
l-06
Jan-
07Ju
l-07
Jan-
08Ju
l-08
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Jan-
11Ju
l-11
Jan-
12Ju
l-12
Jan-
13Ju
l-13
Jan-
14Ju
l-14
$/M
Wh
Real Victorian Pool Price ($Jun 13)Real SMP Quarterly Annual
Price Volatility
• Conditions for price volatility
– Recent increase in reserve margin has dampened volatility – Only during temporary tight supply/demand balance periods (last summer) – Some instances of temporary price spikes in off-peak periods – Induced price volatility during contract renewal periods to maximise contract
premiums – But retailers have responded to historical price spikes by building their own
peaking capacity
Level of Competition
• Generally the spot market has been competitive
– Interregional networks have been unconstrained 95% of the dispatch intervals so not allowing for may periods of price separation.
– Very few instances of yearly moving average prices going above new entry levels
• There have been some instances of strategic bidding
– Difficult to determine whether this is due generators using their market power – Or bidding to maintain reasonable profits
• But increasing levels of horizontal and vertical integration
– Increasing vertical integration probably not yet reached level to be a problem – Barriers or costs for new entrants becoming high
• Vic market not as prone to strategic bidding
Incidence of Price Separation: Vic/SA
-100
0
100
200
300
400
500
600
0 100 200 300 400 500 600
SA Pr
ice, $
/MWh
Vic Price, $/MWh
Price fundamentals
• Electricity markets exhibit a mean reversion characteristic
– In the long run prices converge to the long run marginal cost of new entry – In the short term, prices deviate to short time supply demand conditions
• Most State markets exhibit a supply (bid) curve that is relatively low for a high portion of capacity and then a sharp rise in marginal costs for small portion of capacity
– This is adjusting slowly over time as more shoulder/peaking plant enter the market
– But affected by other factors such as renewable energy support policy
Price fundamentals
$/MWh
MW
Off-peak Demand
Average Demand
Peak Demand
Price fundamentals
$/MWh
MW
Off-peak Demand
Average Demand
Peak Demand
Outlook for Price
• Uncertain times ahead
• Drivers of price trends
– Policy developments – Demand trends – Capital costs – Fuel prices – Strategic decisions
Policy
• Carbon mitigation policy
– Carbon price likely to be repealed – Replaced by ERF
• Energy efficiency • Some low emission generation
– What will occur in the long term • Some form of carbon pricing reintroduced? • Indirect action • Investor response
• Renewable energy policy
– Current review – Target reduction
• Even a reduced target (real 20%) will likely see around 2,000 to 3,000 MW of additional renewables
– Other support policy (CEFC, ARENA)
Demand trends
• AEMO’s latest forecasts indicate subdued demand growth
– Substantial reductions from last year – Large industrial loads leaving
• Uncertainties in demand
– Ongoing operation of other large loads – Small-scale generation uptake – Energy efficiency
• Some wind back of government policy • But more attention being paid to energy efficiency by large scale
enterprises
Demand trends- AEMO Projections
Demand trends – PV uptake
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
MW
Capital costs
• Prime determinant of long run marginal costs
• Historical long term decline but with major cycles
• Latest costs are higher than long term historical trends
– Cyclical and/or structural – Differences in cost trends across technologies
Capital costs
0
50
100
150
200
250
300
350
400
450
500
550 19
92
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Gas
turb
ine
FOB
cos
t, $/
kW $
2013
AUD/kW real USD/kW real
Capital costs
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
3,200
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Gas t
urbine
FOB c
ost, $
/kW $
2013
Brown Black CCGT Black Brown CCGT CCGT (USD)
1992 SKM study for Cth Govt and ESAA
Stanwell Millmerran Kogan Ck
* Productivity growth* Modularisation (offsite construction)* Use of low cost country materials and fabrication* Low global demand for new-build coal plants
* GFC* Rising AUD
* Mining and energy boom
Strategic decisions – Vic SMP Projection – 41 TWh LRET
0
5
10
15
20
25
30
35
40
45
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
$/M
Wh
Conclusions
• Outlook uncertain
• Conflicting trends
– Main uncertainties revolve around policy developments and demand trends • But prices should eventually rise to LRMC levels
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Trends in Wholesale Electricity Prices in Victoria
PRESENTATION TO AIE’S ENERGY PRICING IN VICTORIA: TRENDS, CAUSES AND THE FUTURE, 25 JUNE 2014